UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the Quarterly Period Ended
Or
For the Transition Period from ------------to------------
Commission File Number:
d/b/a Sterling Multifamily Trust
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) | (Zip Code) |
(
(Registrant’s telephone number, including area code)
(Former name, former address and formal fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act
Title of each class: |
| Trading Symbol |
| Name of each exchange on which registered: |
N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large-accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large-accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
Emerging growth company | |||
(Do not check if a smaller reporting company) | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class | Outstanding at May 9, 2022 | |
Common Shares of Beneficial Interest, |
STERLING REAL ESTATE TRUST
INDEX
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of March 31, 2022 (UNAUDITED) and December 31, 2021
March 31, | December 31, | |||||
| 2022 |
| 2021 | |||
(in thousands) | ||||||
ASSETS | ||||||
Real estate investments | ||||||
Land and land improvements | $ | | $ | | ||
Building and improvements | | | ||||
Construction in progress | | | ||||
Real estate investments | | | ||||
Less accumulated depreciation | ( | ( | ||||
Real estate investments, net | | | ||||
Cash and cash equivalents | | | ||||
Restricted deposits | | | ||||
Investment in unconsolidated affiliates | | | ||||
Notes receivable | | | ||||
Lease intangible assets, less accumulated amortization | | | ||||
Other assets, net | | | ||||
Total Assets | $ | | $ | | ||
LIABILITIES | ||||||
Mortgage notes payable, net | $ | | $ | | ||
Dividends payable | | | ||||
Tenant security deposits payable | | | ||||
Lease intangible liabilities, less accumulated amortization | | | ||||
Accrued expenses and other liabilities | | | ||||
Total Liabilities | | | ||||
COMMITMENTS and CONTINGENCIES - Note 13 | ||||||
SHAREHOLDERS' EQUITY | ||||||
Beneficial interest | | | ||||
Noncontrolling interest | ||||||
Operating partnership | | | ||||
Partially owned properties | | | ||||
Accumulated other comprehensive income (loss) | | ( | ||||
Total Shareholders' Equity | | | ||||
$ | | $ | | |||
See Notes to Consolidated Financial Statements
3
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED March 31, 2022 and 2021 (UNAUDITED)
Three Months Ended | |||||
March 31, | |||||
2022 |
| 2021 | |||
(in thousands, except per share data) | |||||
Income from rental operations | |||||
Real estate rental income | $ | | $ | | |
Expenses | |||||
Expenses from rental operations | |||||
Operating expenses | | | |||
Real estate taxes | | | |||
Depreciation and amortization | | | |||
Interest | | | |||
| | ||||
Administration of REIT | | | |||
Total expenses | | | |||
Income from operations | | | |||
Other income | |||||
Equity in losses of unconsolidated affiliates | ( | ( | |||
Other income | | | |||
Gain on sale or conversion of real estate investments | | — | |||
Total other income | | | |||
Net income | $ | | $ | | |
Net income attributable to noncontrolling interest: | |||||
Operating Partnership | | | |||
Partially owned properties | | | |||
Net income attributable to Sterling Real Estate Trust | $ | | $ | | |
Net income attributable to Sterling Real Estate Trust per common share, basic and diluted | | | |||
Comprehensive income: | |||||
Net income | $ | | $ | | |
Other comprehensive gain - change in fair value of interest rate swaps | | | |||
Comprehensive income | | | |||
Comprehensive income attributable to noncontrolling interest | | | |||
Comprehensive income attributable to Sterling Real Estate Trust | $ | | $ | | |
Weighted average Common Shares outstanding, basic and diluted | | | |||
See Notes to Consolidated Financial Statements
4
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED March 31, 2022 and 2021 (UNAUDITED)
Accumulated | Noncontrolling | ||||||||||||||||||||||
Distributions | Total | Interest | Accumulated | ||||||||||||||||||||
Common | Paid-in | in Excess of | Beneficial | Operating | Partially Owned | Comprehensive | |||||||||||||||||
| Shares |
| Capital |
| Earnings |
| Interest |
| Partnership |
| Properties |
| Income (Loss) |
| Total | ||||||||
(in thousands) | |||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2020 | | $ | | $ | ( | $ | | $ | | $ | | $ | ( | $ | | ||||||||
Shares/units redeemed | ( | ( | — | ( | ( | — | — | ( | |||||||||||||||
Dividends and distributions declared | — | — | ( | ( | ( | — | — | ( | |||||||||||||||
Dividends reinvested - stock dividend | | | — | | — | — | — | | |||||||||||||||
Issuance of shares under optional purchase plan | | | — | | — | — | — | | |||||||||||||||
Change in fair value of interest rate swaps | — | — | — | — | — | — | | | |||||||||||||||
Net income | — | — | | | | | — | | |||||||||||||||
BALANCE AT MARCH 31, 2021 | | $ | | $ | ( | $ | | $ | | $ | | $ | | $ | | ||||||||
Accumulated | Noncontrolling | ||||||||||||||||||||||
Distributions | Total | Interest | Accumulated | ||||||||||||||||||||
Common | Paid-in | in Excess of | Beneficial | Operating | Partially Owned | Comprehensive | |||||||||||||||||
Shares | Capital | Earnings | Interest | Partnership | Properties | Income (Loss) | Total | ||||||||||||||||
(in thousands) | |||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2021 | | $ | ($ | $ | $ | $ | ($ | $ | |||||||||||||||
Contribution of assets in exchange for the issuance of noncontrolling interest shares | - | - | - | - | | - | - | | |||||||||||||||
Shares/units redeemed | ( | ( | - | ( | ( | - | - | ( | |||||||||||||||
Dividends and distributions declared | - | - | ( | ( | ( | - | - | ( | |||||||||||||||
Dividends reinvested - stock dividend | | | - | | - | - | - | | |||||||||||||||
Issuance of shares under optional purchase plan | | | - | | - | - | - | | |||||||||||||||
Change in fair value of interest rate swaps | - | - | - | - | - | - | | | |||||||||||||||
Net income | - | - | | | | | - | | |||||||||||||||
BALANCE AT MARCH 31, 2022 | | $ | ($ | $ | $ | $ | $ | $ | |||||||||||||||
See Notes to Consolidated Financial Statements
5
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED March 31, 2022 and 2021 (UNAUDITED)
Three Months Ended | ||||||
March 31, | ||||||
| 2022 |
| 2021 | |||
(in thousands) | ||||||
OPERATING ACTIVITIES | ||||||
Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||
Gain on sale of real estate investments | ( | — | ||||
Equity in loss of unconsolidated affiliates | | | ||||
Distributions of earnings of unconsolidated affiliates | | | ||||
Allowance for uncollectible accounts receivable | ( | ( | ||||
Depreciation | | | ||||
Amortization | | | ||||
Amortization of debt issuance costs | | | ||||
Effects on operating cash flows due to changes in | ||||||
Other assets | | | ||||
Tenant security deposits payable | | | ||||
Accrued expenses and other liabilities | ( | ( | ||||
NET CASH PROVIDED BY OPERATING ACTIVITIES | | | ||||
INVESTING ACTIVITIES | ||||||
Purchase of real estate investment properties | ( | — | ||||
Capital expenditures and tenant improvements | ( | ( | ||||
Proceeds from sale of real estate investments and non-real estate investments | | — | ||||
Proceeds from involuntary conversion | | | ||||
Investment in unconsolidated affiliates | ( | ( | ||||
Distributions in excess of earnings received from unconsolidated affiliates | | | ||||
Notes receivable issued net of payments received | | | ||||
NET CASH USED IN INVESTING ACTIVITIES | ( | ( | ||||
FINANCING ACTIVITIES | ||||||
Payments for financing, debt issuance | ( | ( | ||||
Payments on investment certificates and subordinated debt | — | ( | ||||
Proceeds from issuance of mortgage notes payable and subordinated debt | | | ||||
Principal payments on mortgage notes payable | ( | ( | ||||
Proceeds from issuance of shares under optional purchase plan | | | ||||
Shares/units redeemed | ( | ( | ||||
Dividends/distributions paid | ( | ( | ||||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | | ( | ||||
NET CHANGE IN CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS | | | ||||
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT BEGINNING OF PERIOD | | | ||||
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD | $ | | $ | | ||
|
| |||||
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD | ||||||
Cash and cash equivalents | $ | | $ | | ||
Restricted deposits | | | ||||
TOTAL CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS, END OF PERIOD | $ | | $ | | ||
See Notes to Consolidated Financial Statements
6
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED March 31, 2022 and 2021 (UNAUDITED) (Continued)
Year Ended | ||||||
March 31, | ||||||
| 2022 |
| 2021 | |||
(in thousands) | ||||||
SCHEDULE OF CASH FLOW INFORMATION | ||||||
Cash paid during the period for interest, net of capitalized interest | $ | | $ | | ||
SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES | ||||||
Dividends reinvested | $ | | $ | | ||
Dividends declared and not paid | | | ||||
UPREIT distributions declared and not paid | | | ||||
Acquisition of assets in exchange for the issuance of noncontrolling interest units in UPREIT | | — | ||||
Increase in land improvements due to increase in special assessments payable | — | | ||||
Unrealized gain on interest rate swaps | | | ||||
Acquisition of assets through assumption of debt and liabilities | ( | — | ||||
Capitalized interest and real estate taxes related to construction in progress | | | ||||
See Notes to Consolidated Financial Statements
7
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022 and 2021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Note 1 - Organization
Sterling Real Estate Trust, d/b/a Sterling Multifamily Trust (“Sterling,” the “Trust” or the “Company”) is a registered, but unincorporated business trust organized in North Dakota in December 2002. Sterling has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code.
Sterling previously established an operating partnership (Sterling Properties, LLLP or the “Operating Partnership”) and transferred all of its assets and liabilities to the Operating Partnership in exchange for general partnership units. As the general partner, Sterling has management responsibility for all activities of the Operating Partnership. As of March 31, 2022 and December 31, 2021, Sterling owned approximately
NOTE 2 – PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2021, which have previously been filed with the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted from this report on Form 10-Q pursuant to the rules and regulations of the SEC.
The results for the interim periods shown in this report are not necessarily indicative of future financial results. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary to present fairly our consolidated financial statements as of and for the year ended March 31, 2022. These adjustments are of a normal recurring nature.
Principles of Consolidation
The consolidated financial statements include the accounts of Sterling, Sterling Properties, LLLP, and wholly owned limited liability companies. All significant intercompany transactions and balances have been eliminated in consolidation.
As of March 31, 2022, the Trust owned approximately
8
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022 and 2021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Additionally, we evaluate the need to consolidate affiliates based on standards set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation (“ASC 810”). In determining whether we have a requirement to consolidate the accounts of an entity, management considers factors such as our ownership interest, our authority to make decisions and contractual and substantive participating rights of the limited partners and shareholders, as well as whether the entity is a variable interest entity (“VIE”) for which we have both: a) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, and b) the obligation to absorb losses or the right to receive benefits from the VIE that could be potentially significant to the VIE. The Trust will consolidate the operations of a joint venture if the Trust determines that it is the primary beneficiary of a variable interest entity (VIE) and has substantial influence and control of the entity.
In instances where the Trust determines that it is not the primary beneficiary of a VIE and the Trust does not control the joint venture but can exercise influence over the entity with respect to its operations and major decisions, the Trust will use the equity method of accounting. Under the equity method, the operations of a joint venture will not be consolidated with the Trust’s operations but instead its share of operations will be reflected as equity in earnings (losses) of unconsolidated affiliates on its consolidated statements of operations and comprehensive loss. Additionally, the Trust’s net investment in the joint venture will be reflected as investment in unconsolidated affiliates on the consolidated balance sheets. See Note 5 for additional details regarding variable interest entities where the Trust uses the equity method of investing.
The Operating Partnership meets the criteria as a variable interest entity (“VIE”). The Trust’s sole significant asset is its investment in the Operating Partnership. As a result, substantially all of the Trust’s assets and liabilities represent those assets and liabilities of the Operating Partnership. All of the Trust’s debt is an obligation of the Operating Partnership, and the Trust guarantees the unsecured debt obligations of the Operating Partnership.
Concentration of Credit Risk
Our cash balances are maintained in various bank deposit accounts. The bank deposit amounts in these accounts may exceed federally insured limits at various times throughout the year.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Real Estate Investments
Real estate investments are recorded at cost less accumulated depreciation. Ordinary repairs and maintenance are expensed as incurred.
The Trust allocates the purchase price of each acquired investment property accounted for as an asset acquisition based upon the relative fair value at acquisition date of the individual assets acquired and liabilities assumed, which generally include (i) land, (ii) building and other improvements, (iii) in-place lease intangibles, (iv) acquired above and below market lease intangibles, and (v) assumed financing that is determined to be above or below market, if any. Transaction costs related to acquisitions are accounted for as asset acquisitions and capitalized as a cost of the property.
9
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022 and 2021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
For tangible assets acquired, including land, building and other improvements, the Trust considers available comparable market and industry information in estimating acquisition date fair value. Key factors considered in the calculation of fair value of both real property and intangible assets include the current market rent values, “dark” periods (building in vacant status), direct costs estimated with obtaining a new tenant, discount rates, escalation factors, standard lease terms, and tenant improvement costs.
Furniture and fixtures are stated at cost less accumulated depreciation. Expenditures for renewals and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for routine maintenance and repairs, which do not add to the value or extend useful lives, are expensed as incurred.
Depreciation is provided for over the estimated useful lives of the individual assets using the straight-line method over the following estimated useful lives:
Buildings and improvements |
| |
Furniture, fixtures and equipment |
|
The Trust’s investment properties are reviewed for potential impairment at the end of each reporting period or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. At the end of each reporting period, the Trust separately determines whether impairment indicators exist for each property.
Based on evaluation, there were
Federal Income Taxes
We have elected to be taxed as a REIT under the Internal Revenue Code, as amended. A REIT calculates taxable income similar to other domestic corporations, with the major difference being a REIT is entitled to a deduction for dividends paid. A REIT is generally required to distribute each year at least
We intend to continue to qualify as a REIT and, provided we maintain such status, will not be taxed on the portion of the income that is distributed to shareholders. In addition, we intend to distribute all of our taxable income; therefore,
We follow ASC Topic 740, Income Taxes, to recognize, measure, present and disclose in our consolidated financial statements uncertain tax positions that we have taken or expect to take on a tax return. As of March 31, 2022 and December 31, 2021, we did not have any liabilities for uncertain tax positions that we believe should be recognized in our consolidated financial statements. We are no longer subject to Federal and State tax examinations by tax authorities for years before 2018.
Revenue Recognition
The Trust is the lessor for its residential and commercial leases. Leases are analyzed on an individual basis to determine lease classification. As of March 31, 2022, all leases analyzed under the Trust’s lease classification process were determined to be operating leases.
10
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022 and 2021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Earnings per Common Share
Basic earnings per common share is computed by dividing net income available to common shareholders (the “numerator”) by the weighted average number of common shares outstanding (the “denominator”) during the period. Sterling had
For the three months ended March 31, 2022 and 2021, Sterling’s denominators for the and earnings per common share were approximately
NOTE 3 – segment reporting
We report our results in
Segment Revenues and Net Operating Income
The revenues and net operating income for the reportable segments (residential and commercial) are summarized as follows for the years ended March 31, 2022 and 2021, along with reconciliations to the consolidated financial statements. Segment assets are also reconciled to Total Assets as reported in the consolidated financial statements.
Three months ended March 31, 2022 | Three months ended March 31, 2021 | |||||||||||||||||
| Residential |
| Commercial |
| Total |
| Residential |
| Commercial |
| Total | |||||||
(in thousands) | (in thousands) | |||||||||||||||||
Income from rental operations | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Expenses from rental operations | | | | | | | ||||||||||||
Net operating income | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Depreciation and amortization | | | ||||||||||||||||
Interest | | | ||||||||||||||||
Administration of REIT | | | ||||||||||||||||
Other income | ( | ( | ||||||||||||||||
Net income | $ | | $ | | ||||||||||||||
11
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022 and 2021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Segment Assets and Accumulated Depreciation
As of March 31, 2022 |
| Residential |
| Commercial |
| Total | |||
(in thousands) | |||||||||
Real estate investments | $ | | $ | | $ | | |||
Accumulated depreciation | ( | ( | ( | ||||||
Total real estate investments, net | $ | | $ | | $ | | |||
Intangible assets, less accumulated amortization | | | | ||||||
Cash and cash equivalents | | ||||||||
Restricted deposits | | ||||||||
Investment in unconsolidated affiliates | | ||||||||
Notes receivable | | ||||||||
Other assets, net | | ||||||||
Total Assets | $ | | |||||||
As of December 31, 2021 |
| Residential |
| Commercial |
| Total | |||
(in thousands) | |||||||||
Real estate investments | $ | | $ | | $ | | |||
Accumulated depreciation | ( | ( | ( | ||||||
Total real estate investments, net | $ | | $ | | $ | | |||
Intangible assets, less accumulated amortization | — | | | ||||||
Cash and cash equivalents | | ||||||||
Restricted deposits | | ||||||||
Investment in unconsolidated affiliates | | ||||||||
Notes receivable | | ||||||||
Other assets, net | | ||||||||
Total Assets | $ | | |||||||
NOTE 4 – restricted deposits and funded reserves
The following table summarizes the Trust’s restricted deposits and funded reserves.
| As of March 31, | As of December 31, | |||||||
2022 | 2021 | ||||||||
(in thousands) | |||||||||
Tenant security deposits | $ | | $ | | |||||
Real estate tax and insurance escrows | | | |||||||
Replacement reserves | | | |||||||
Other funded reserves | | | |||||||
$ | | $ | | ||||||
12
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022 and 2021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
NOTE 5 – INVESTMENT IN UNCONSOLIDATED AFFILIATES
The Company’s investments in unconsolidated real estate ventures, are summarized as follows (in thousands):
Total Investment in Unconsolidated Affiliates at | ||||||||||||
Unconsolidated Affiliates | Date Acquired | Trust Ownership Interest | March 31, | December 31, 2021 | ||||||||
Banner Building | 2007 | $ | | $ | | |||||||
Grand Forks INREIT, LLC | 2003 | | | |||||||||
SE Savage, LLC | 2019 | | | |||||||||
SE Maple Grove, LLC | 2019 | | | |||||||||
SE Rogers, LLC | 2020 | | | |||||||||
ST Oak Cliff, LLC | 2021 | | | |||||||||
SE Brooklyn Park, LLC | 2021 | | | |||||||||
$ | | $ | | |||||||||
The Operating Partnership owns a
The Operating Partnership is a
The Operating Partnership owns a
The Operating Partnership owns a
The Operating Partnership owns a
The Operating Partnership owns a
13
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022 and 2021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
assets of $
The Operating Partnership owns a
The following is a summary of the financial position of the unconsolidated affiliates at March 31, 2022 and December 31, 2021.
| March 31, |
| December 31, 2021 | |||
(in thousands) | ||||||
ASSETS | ||||||
Real estate investments | $ | | $ | | ||
Accumulated depreciation | ( | ( | ||||
| | |||||
Cash and cash equivalents | | | ||||
Restricted deposits | | | ||||
Intangible assets, less accumulated amortization | | | ||||
Other assets, net | | | ||||
Total Assets | $ | | $ | | ||
LIABILITIES | ||||||
Mortgage notes payable, net | $ | | $ | | ||
Tenant security deposits payable | | | ||||
Accrued expenses and other liabilities | | | ||||
Total Liabilities | $ | | $ | | ||
SHAREHOLDERS' EQUITY | ||||||
Total Shareholders' Equity | $ | | $ | | ||
Total liabilities and shareholders' equity | $ | | $ | | ||
The following is a summary of results of operations of the unconsolidated affiliates for the three months ended March 31, 2022 and 2021.
Three months ended | ||||||
| 2022 |
| 2021 | |||
(in thousands) | ||||||
Income from rental operations | $ | | $ | | ||
Expenses from rental operations | | | ||||
Net operating income | $ | | $ | | ||
Depreciation and Amortization | | | ||||
Interest | | | ||||
Other expense | | - | ||||
Net loss | $ | ( | $ | ( | ||
14
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022 and 2021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
NOTE 6 - Lease intangibles
The following table summarizes the net value of other intangible assets and liabilities and the accumulated amortization for each class of intangible:
Lease | Accumulated | Lease | |||||||
As of March 31, 2022 |
| Intangibles |
| Amortization |
| Intangibles, net | |||
Lease Intangible Assets | (in thousands) | ||||||||
In-place leases | $ | | $ | ( | $ | | |||
Above-market leases | | ( | | ||||||
$ | | $ | ( | $ | | ||||
Lease Intangible Liabilities | |||||||||
Below-market leases | $ | ( | $ | | $ | ( | |||
Lease | Accumulated | Lease | |||||||
As of December 31, 2021 |
| Intangibles |
| Amortization |
| Intangibles, net | |||
Lease Intangible Assets | (in thousands) | ||||||||
In-place leases | $ | | $ | ( | $ | | |||
Above-market leases | | ( | | ||||||
$ | | $ | ( | $ | | ||||
Lease Intangible Liabilities | |||||||||
Below-market leases | $ | ( | $ | | $ | ( | |||
The estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows:
Intangible | Intangible | |||||
Years ending December 31, |
| Assets |
| Liabilities | ||
(in thousands) | ||||||
2022 (April 1, 2022 - December 31, 2022) | $ | | $ | | ||
2023 | | | ||||
2024 | | | ||||
2025 | | | ||||
2026 | | | ||||
Thereafter | | | ||||
$ | | $ | | |||
NOTE 7 – LINES OF CREDIT
We have a $
Certain lines of credit agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios.
15
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022 and 2021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
NOTE 8 - MORTGAGE NOTES PAYABLE
The following table summarizes the Trust’s mortgage notes payable.
Principal Balance At | ||||||
March 31, | December 31, | |||||
2022 | 2021 | |||||
(in thousands) | ||||||
Fixed rate mortgage notes payable (a) | $ | | $ | | ||
Variable rate mortgage notes payable | | | ||||
Mortgage notes payable | | | ||||
Less unamortized debt issuance costs | | | ||||
$ | | $ | | |||
| (a) | Includes $ |
We are required to make the following principal payments on our outstanding mortgage notes payable for each of the five succeeding fiscal years and thereafter as follows:
Years ending December 31, |
| Amount | |
(in thousands) | |||
2022 (April 1, 2022 - December 31, 2022) | $ | | |
2023 | | ||
2024 | | ||
2025 | | ||
2026 | | ||
Thereafter | | ||
Total payments | $ | | |
NOTE 9 – DERIVATIVES AND HEDGING ACTIVITIES
As part of our interest rate risk management strategy, we have used derivative instruments to manage our exposure to interest rate movements and add stability to interest expense. Interest rate swaps designated as cash flow hedges involve the receipt of variable rate amounts from a counterparty in exchange for the Trust making fixed rate payments over the life of the agreement without exchange of the underlying notional amount.
As of March 31, 2022, the Trust used
16
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022 and 2021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
The following table summarizes the Trust’s interest rate swaps as of March 31, 2022, which effectively convert on month floating rate LIBOR to a fixed rate:
Fixed | ||||||
Effective Date | Notional | Interest Rate | Maturity Date | |||
November 1, 2019 | $ | | ||||
November 1, 2019 | $ | | ||||
January 10, 2020 | $ | | ||||
June 11, 2020 | $ | | ||||
June 11, 2020 | $ | | ||||
June 15, 2020 | $ | | ||||
June 15, 2020 | $ | | ||||
July 1, 2020 | $ | | ||||
December 2, 2020 | $ | | ||||
July 1, 2021 | $ | | ||||
November 10, 2021 | $ | | ||||
December 1, 2021 | $ | |
The following table summarizes the Trust’s interest rate swaps that were designated as cash flow hedges of interest rate risk:
Number of Instruments | Notional | |||||||
Interest Rate Derivatives | March 31, 2022 | December 31, 2021 | March 31, 2022 | December 31, 2021 | ||||
Interest rate swaps | $ | | $ | | ||||
The table below presents the estimated fair value of the Trust’s derivative financial instruments as well as their classification in the accompanying consolidated balance sheets. The valuation techniques are described in Note 10 to the consolidated financial statements.
Derivatives | ||||||||
Derivatives designated as | March 31, 2022 | December 31, 2021 | ||||||
cash flow hedges: | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||
Interest rate swaps | Other assets, net | $ | | Other assets, net | $ | | ||
Interest rate swaps | Accrued expenses and other liabilities | $ | — | Accrued expenses and other liabilities | $ | | ||
The carrying amount of the swaps have been adjusted to their fair value at the end of the quarter, which because of changes in forecasted levels of LIBOR, resulted in reporting an asset and liability for the fair value of the future net payments forecasted under the swap. The interest rate swap is accounted for as an effective hedge in accordance with ASC 815-20 whereby it is recorded at fair value and changes in fair value are recorded to comprehensive income.
17
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022 and 2021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
The following table presents the effect of the Company’s derivative financial instruments on the accompanying consolidated statements of operations and other comprehensive loss (income) for the quarters ended March 31, 2022 and 2021:
Location of Gain | ||||||
Amount of (Gain)/Loss | Reclassified from | |||||
Derivatives in | Recognized in Other | Accumulated other | Amount of (Gain)/Loss | |||
Cash Flow Hedging | Comprehensive Income | Comprehensive Income | Reclassified from | |||
Relationships | on Derivatives | (AOCI) into Income | AOCI into Income | |||
2022 | 2022 | |||||
Interest rate swaps | $ | ( | Interest expense | $ | | |
2021 | 2021 | |||||
Interest rate swaps | $ | ( | Interest expense | $ | |
Credit-risk-related Contingent Features
The Trust’s agreements with each of its derivative counterparties also contain a provision whereby if the Trust consolidates with, merges with or into, or transfers all or substantially all of its assets to another entity and the creditworthiness of the resulting, surviving or transferee entity, is materially weaker than the Trust’s, the counterparty has the right to terminate the derivative obligations. As of March 31, 2022, the termination value of derivatives in an asset position was $
NOTE 10 - FAIR VALUE MEASUREMENT
The following table presents the carrying value and estimated fair value of the Company’s financial instruments:
March 31, 2022 | December 31, 2021 | |||||||||||
Carrying | Carrying | |||||||||||
| Value |
| Fair Value |
| Value |
| Fair Value | |||||
(in thousands) | ||||||||||||
Financial assets: | ||||||||||||
Notes receivable | $ | | $ | | $ | | $ | | ||||
Derivative assets | $ | | $ | | $ | | $ | | ||||
Financial liabilities: | ||||||||||||
Mortgage notes payable | $ | | $ | | $ | | $ | | ||||
Derivative liabilities | $ | — | $ | — | $ | | $ | | ||||
ASC 820-10 established a three-level valuation hierarchy for fair value measurement. Management uses these valuation techniques to establish the fair value of the assets at the measurement date. These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect management’s assumptions.
18
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022 and 2021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
These two types of inputs create the following fair value hierarchy:
| ● | Level 1 – Quoted prices for identical instruments in active markets. |
| ● | Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable. |
| ● | Level 3 – Instruments whose significant inputs are unobservable. |
The guidance requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
Recurring Fair Value Measurements
The following table presents the Company’s financial instruments, which are measured at fair value on a recurring basis, by the level in the fair value hierarchy within which those measurements fall. Methods and assumptions used to estimate the fair value of these instruments are described after the table.
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
(in thousands) | ||||||||||||
March 31, 2022 | ||||||||||||
Derivative assets | $ | — | $ | | $ | — | $ | | ||||
December 31, 2021 | ||||||||||||
Derivative assets | $ | — | $ | | $ | — | $ | | ||||
Derivative liabilities | $ | — | $ | | $ | — | $ | | ||||
Derivatives: The fair value of interest rate swaps is determined using a discounted cash flow analysis on the expected future cash flows of the derivative.
The Company has determined that its derivative valuations in their entirety are classified within Level 2 of the fair value hierarchy. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered any applicable credit enhancements.
Fair Value Disclosures
The following table presents the Company’s financial assets and liabilities, which are measured at fair value for disclosure purposes, by the level in the fair value hierarchy within which they fall. Methods and assumptions used to estimate the fair value of these instruments are described after the table.
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
(in thousands) | ||||||||||||
March 31, 2022 | ||||||||||||
Mortgage notes payable | $ | — | $ | — | $ | | $ | | ||||
Notes receivable | $ | — | $ | — | $ | | $ | | ||||
December 31, 2021 | ||||||||||||
Mortgage notes payable | $ | — | $ | — | $ | | $ | | ||||
Notes receivable | $ | — | $ | — | $ | | $ | | ||||
19
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022 and 2021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Mortgage notes payable: The Company estimates the fair value of its mortgage notes payable by discounting the future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities by the Company’s lenders. The rates used range from
Notes receivable: The Trust estimates the fair value of its notes receivable by discounting future cash flows of each instrument at rates currently offered to the Trust for similar note instruments of comparable maturities by the Trust’s lenders. The rate used was
NOTE 11 – LEASES
As of March 31, 2022, we derived
As of March 31, 2022, we derived
We recognize variable income from pass-through expenses on an accrual basis over the periods in which the expenses were incurred. Pass-through expenses are comprised of real estate taxes, operating expenses and common area maintenance costs which are reimbursed by tenants in accordance with specific allowable costs per tenant lease agreements. When we pay pass-through expenses, subject to reimbursement by the tenant, they are included within operating expenses, excluding real estate taxes, and reimbursements are included within “real estate rental income” along with the associated base rent in the accompanying consolidated financial statements.
Lease income related to the Company’s operating leases is comprised of the following:
Three months ended March 31, 2022 | |||||||||
| Residential |
| Commercial |
| Total | ||||
(in thousands) | |||||||||
Lease income related to fixed lease payments | $ | | $ | | $ | | |||
Lease income related to variable lease payments | — | | | ||||||
Other (a) | ( | | ( | ||||||
Lease Income (b) | $ | | $ | | $ | | |||
| (a) | For the three months ended March 31, 2022, “Other” is comprised of revenue adjustments related to changes in collectability and amortization of above and below market lease intangibles and lease inducements. |
| (b) | Excludes other rental income for the three months ended March 31, 2022 of $ |
20
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022 and 2021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Three months ended March 31, 2021 | |||||||||
| Residential |
| Commercial |
| Total | ||||
(in thousands) | |||||||||
Lease income related to fixed lease payments | $ | | $ | | $ | | |||
Lease income related to variable lease payments | — | | | ||||||
Other (c) | ( | | | ||||||
Lease Income (d) | $ | | $ | | $ | | |||
| (c) | For the three months ended March 31, 2021, “Other” is comprised of revenue adjustments related to changes in collectability and amortization of above and below market lease intangibles and lease inducements. |
| (d) | Excludes other rental income for the three months ended March 31, 2021 of $ |
As of March 31, 2022, non-cancelable commercial operating leases provide for future minimum rental income as follows. Apartment leases are not included as the terms are generally for one year or less.
Years ending December 31, |
| Amount | |
(in thousands) | |||
2022 (April 1, 2022- December 31, 2022) | $ | | |
2023 | | ||
2024 | | ||
2025 | | ||
2026 | | ||
Thereafter | | ||
$ | | ||
NOTE 12 – RELATED PARTY TRANSACTIONS
Sterling Management, LLC (the “Advisor”), a North Dakota limited liability company formed in November 2002. The Advisor is responsible for managing day-to-day affairs, overseeing capital projects, and identifying, acquiring, and disposing investments on behalf of the trust.
GOLDMARK Property Management, Inc., a North Dakota limited liability company formed in 1981. GOLDMARK Property Management performs property management services for the Trust.
We have a historical and ongoing relationship with Bell Bank. Bell Bank has provided the Trust certain financial services throughout the relationship.
The Trust has a historical and ongoing relationship with Trumont Group and Trumont Construction. Trumont Group provides development services for current joint venture projects the Operating Partnership is an investor in. Trumont Construction has been engaged to construct the properties associated with these joint ventures. Mr. Regan, Chief Executive Officer and trustee, is a partner in both Trumont Group and Trumont Construction and has a direct material interest in any engagement or related transaction, the Trust enters into, with these entities.
21
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022 and 2021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Property Management Fee
During the year ended March 31, 2022 and 2021, we paid fees to GOLDMARK Property Management, Inc. related to the management of properties, on-site staff costs and other miscellaneous fees required to run the property of $
Advisory Agreement
We are an externally managed trust and as such, although we have a Board of Trustees and Executive Officers responsible for our management, we have
The below table summarizes the fees incurred to our Advisor.
Three Months ended March 31, | ||||||
2022 | 2021 | |||||
(in thousands) | ||||||
Fee: | ||||||
Advisory | $ | | $ | | ||
Acquisition | $ | | $ | | ||
Disposition | $ | | $ | - | ||
Financing | $ | | $ | | ||
Project Management | $ | | $ | | ||
The below table summarizes the fees payable to our Advisor.
Payable at | ||||||
March 31, | December 31, | |||||
2022 | 2021 | |||||
(in thousands) | ||||||
Fee: | ||||||
Advisory | $ | | $ | | ||
Financing | $ | - | $ | | ||
Development | $ | - | $ | | ||
Project Management | $ | | $ | | ||
22
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022 and 2021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Operating Partnership Units Issued in Connection with Acquisitions
During the three months ended March 31, 2022,
During the three months ended March 31, 2021, there were
Commissions
During the three months ended March 31, 2022 and 2021, we incurred real estate commissions of $
During the three months ended March 31, 2022, we incurred real estate commissions of $
Rental Income
During the three months ended March 31, 2022 and 2021, we received rental income of $
During the three months ended March 31, 2022, we received
During the three months ended March 31, 2022 and 2021, we received rental income of $
During the three months ended March 31, 2022 and 2021, we received rental income of $
Other operational activity
During the three months ended March 31, 2022 and 2021, the Trust incurred $
Debt Financing
At March 31, 2022 and December 31, 2021, the Trust had $
23
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022 and 2021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Development Arrangements
During the three months ended March 31, 2022, the Trust incurred $
During the three months ended March 31, 2022, the Trust incurred $
During the three months ended March 31, 2022, the Trust incurred $
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Environmental Matters
Federal law (and the laws of some states in which we own or may acquire properties) imposes liability on a landowner for the presence on the premises of hazardous substances or wastes (as defined by present and future federal and state laws and regulations). This liability is without regard to fault or knowledge of the presence of such substances and may be imposed jointly and severally upon all succeeding landowners. If such hazardous substance is discovered on a property acquired by us, we could incur liability for the removal of the substances and the cleanup of the property.
There can be no assurance that we would have effective remedies against prior owners of the property. In addition, we may be liable to tenants and may find it difficult or impossible to sell the property either prior to or following such a cleanup.
Risk of Uninsured Property Losses
We maintain property damage, fire loss, and liability insurance. However, there are certain types of losses (generally of a catastrophic nature) which may be either uninsurable or not economically insurable. Such excluded risks may include war, earthquakes, tornadoes, certain environmental hazards, and floods. Should such events occur, (i) we might suffer a loss of capital invested, (ii) tenants may suffer losses and may be unable to pay rent for the spaces, and (iii) we may suffer a loss of profits which might be anticipated from one or more properties.
Litigation
The Trust is subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business. While the resolution of such matters cannot be predicted with certainty, management believes, based on currently available information, that the final outcome of such matters will not have a material effect on the financial statements of the Trust.
24
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022 and 2021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
NOTE 14 – DISPOSITIONS
During the year ended March 31, 2022, the Trust disposed of
NOTE 15 – ACQUISITIONS
The Trust had
Date | Property Name | Location | Property Type | Units/ Square Footage/ Acres | Total Acquisition Cost | ||||||||
2/28/22 | Deer Park | Hutchinson, MN | Apartment Complex | $ | | ||||||||
$ | | ||||||||||||
Total consideration given for acquisitions through March 31, 2022 was completed through issuing approximately
Three months ended | |||||||
March 31, | |||||||
2022 | 2021 | ||||||
(in thousands) | |||||||
Real estate investment acquired | $ | | $ | - | |||
Acquired lease intangible assets | | - | |||||
Assumed Assets | | - | |||||
Total Assets Acquired | $ | | $ | - | |||
Other liabilities | ( | - | |||||
Net assets acquired | | - | |||||
Equity/limited partnership unit consideration | ( | - | |||||
Net cash consideration | $ | | $ | - | |||
NOTE 16 - SUBSEQUENT EVENTS
On April 15, 2022, we paid a dividend or distribution of $
On May 2, 2022, the Trust received proceeds of $
Pending acquisitions and dispositions are subject to numerous conditions and contingencies and there are no assurances that the transactions will be completed.
We have evaluated subsequent events through the date of this filing. We are not aware of any other subsequent events which would require recognition or disclosure in the consolidated financial statements.
25
All dollar amounts in this Form 10-Q in Part I Items 2. through 4. and Part II Items 2. are stated in thousands with the exception of share and per share amounts, unless otherwise indicated.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Certain statements contained in this section and elsewhere in this Form 10-Q constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of known and unknown risks, uncertainties and other factors which may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Please see “Note Regarding Forward-Looking Statements” and “Risk Factors” for more information. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statements were made and are not guarantees of future performance.
Overview
Sterling Real Estate Trust d/b/a Sterling Multifamily Trust (“Sterling,” “the “Trust” or the “Company”) is a registered, but unincorporated business trust organized in North Dakota in December 2002. Sterling has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code, which requires that 75% of the assets of a REIT must consist of real estate assets and that 75% of its gross income must be derived from real estate. The net income of the REIT is allocated in accordance with the stock ownership in the same fashion as a regular corporation. Our real estate portfolio consisted of 182 properties containing 10,926 apartment units and approximately 1,607,000 square feet of leasable commercial space as of March 31, 2022. The portfolio has a net book value of real estate investments (cost less accumulated depreciation) of approximately $727,279, which includes construction in progress. Sterling’s current acquisition strategy and focus is on multifamily apartment properties.
Critical Accounting Estimates
Below are accounting policies and estimates that management believes are critical to the preparation of the unaudited consolidated financial statements included in this Report. Certain accounting policies used in the preparation of these consolidated financial statements are particularly important for an understanding of the financial position and results of operations presented in the historical consolidated financial statements included in this Report. A summary of significant accounting policies is also provided in the aforementioned notes to our consolidated financial statements (see note 2 to the unaudited consolidated financial statements). These policies require the application of judgment and assumptions by management and, as a result, are subject to a degree of uncertainty. Due to this uncertainty, actual results could differ materially from estimates calculated and utilized by management.
Impairment of Real Estate Investments
The Trust will review each property within its portfolio, every quarter for potential impairment through various screening mechanisms (identifiers) to determine if there are indicators of impairment on a property. If so, the property is further analyzed through an undiscounted cash flow test. An identifier is not an indicator or triggering event for impairment; however, it is a mechanism to highlight an item on a property, which warrants further consideration and analysis to determine if an indicator is present. The following are examples of activities that are review quarterly:
| ● | An individual property’s weighted average cost of capital is not meeting its required rate as calculated by management. |
| ● | Significant decline in Operational NOI in relation to individual residential properties. |
| ● | Significant decline in NOI in relation to individual commercial properties. |
| ● | Significant quarter over quarter decrease in occupancy. |
If the presence of one or more impairment identifier is noted through a screening mechanism at the end of the reporting period or throughout the year with respect to an investment property, the asset is further analyzed to determine if an indicator of impairment exists. If further analysis does not explain the properties performance, the Trust considers this to
26
provide evidence that an indicator of impairment does exist, the property is then subject to additional impairment analysis, and an undiscounted cash flow analysis is performed on the individual property. Indicators of impairment include:
| ● | Sustained reduction in cash flows/NOI that was not due to a planned action taken by the Company to improve long term operations and where discussion and review with the Portfolio management team cannot support a significant decline or insufficient NOI Coverage. |
Additionally, Sterling considers certain occurrences at a property to be a triggering event, causing an analysis of impairment to occur, and an undiscounted cash flow analysis is performed. Triggering Events of impairment include:
| ● | Continued difficulty in leasing property or renewing existing leases. Factors considered include: |
| ◾ | Competitors building significantly newer properties. |
| ◾ | Competitors are relocating out of the area. |
| ◾ | Tenant downsizing and needing less square footage. |
| ◾ | Significant decrease in market prices not in line with general market trends. |
| ◾ | Property make-up of units is not in line with market trends. |
| ◾ | Demographics of property. |
| ● | A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition. |
| ● | A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator. |
| ● | A current expectation that, “more likely than not,” a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50 percent. As such, any property approved by the Board of Trustees to be sold, will be evaluated for impairment. |
To the extent impairment has occurred, the Trust will record an impairment charge calculated as the excess of the carrying value of the asset over its fair value for impairment of investment properties. Based on evaluation, there were no impairment losses during the three months ended March 31, 2022 and 2021.
There have been no material changes in our Critical Accounting Policies as disclosed in Note 2 to our financial statements for the year ended March 31, 2022 included elsewhere in this report.
Acquisition of Real Estate Investments
The Company allocates the purchase price of properties that meet the definition of an asset acquisition to net tangible and identified intangible assets acquired based on their relative fair values. In making estimates of relative fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property, our own analysis of recently acquired and existing comparable properties in our portfolio and other market data. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing, and leasing activities in estimating the relative fair value of the tangible and intangible assets acquired.
REIT Status
We operate in a manner intended to enable us to continue to qualify as a REIT under Sections 856-860 of the Internal Revenue Code. Under those sections, a REIT which distributes at least 90% of its REIT taxable income, excluding net capital gains, as a distribution to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. We intend to distribute to our shareholders 100% of our taxable income. Therefore, no provision for Federal income taxes is required. If we fail to distribute the required amount of income to our shareholders, we would fail to qualify as a REIT and substantial adverse tax consequences may result.
27
Principal Business Activity
Sterling currently directly owns 182 properties. The Trust’s 138 residential properties are located in North Dakota, Minnesota, Missouri, and Nebraska and are principally multifamily apartment buildings. The Trust owns 44 commercial properties primarily located in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Nebraska, and Wisconsin. The commercial properties include retail, office, industrial, and medical properties. The Trust’s mix of properties is 76.1% residential and 23.9% commercial (based on cost) with a total carrying value of $727,279 at March 31, 2022. Currently our focus is limited to multifamily apartment properties. We will consider unsolicited offers for purchase of commercial properties on a case-by-case basis.
The following table represents the number of properties the Trust owns in each state as of March 31, 2022.
Residential Property |
| Location |
| No. of Properties |
| Units |
North Dakota | 117 | 6,958 | ||||
Minnesota | 16 | 3,169 | ||||
Missouri | 1 | 164 | ||||
Nebraska | 4 | 639 | ||||
138 | 10,930 | |||||
Commercial Property |
| Location |
| No. of Properties |
| Sq. Ft |
North Dakota | 20 | 772,000 | ||||
Arkansas | 2 | 28,000 | ||||
Colorado | 1 | 17,000 | ||||
Iowa | 1 | 33,000 | ||||
Louisiana | 1 | 15,000 | ||||
Michigan | 1 | 12,000 | ||||
Minnesota | 11 | 633,000 | ||||
Mississippi | 1 | 15,000 | ||||
Nebraska | 1 | 19,000 | ||||
Wisconsin | 5 | 63,000 | ||||
44 | 1,607,000 |
Results of Operations
Management Highlights
| ● | Increased revenues from rental operations by $1,535 or 5.9% for the three months ended March 31, 2022, compared to the same three month-period in 2021. |
| ● | One residential property with a total cost of $15,073 was acquired during the three months ended March 31, 2022. |
| ● | Disposed of one commercial property during the three months ended March 31, 2022. |
| ● | Declared and paid dividends aggregating $1.1500 per common share for the three months ending March 31, 2022. |
28
Results of Operations for the Three Months Ended March 31, 2022 and 2021
Three months ended March 31, 2022 |
| Three months ended March 31, 2021 | ||||||||||||||||
| Residential |
| Commercial |
| Total |
| Residential |
| Commercial |
| Total | |||||||
(unaudited) | (unaudited) | |||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||
Real Estate Revenues |
| $ | 27,494 |
| $ | 5,422 |
| $ | 32,916 |
| $ | 25,959 |
| $ | 5,801 |
| $ | 31,760 |
Real Estate Expenses | ||||||||||||||||||
Real Estate Taxes | 2,846 | 651 | 3,497 | 2,579 | 665 | 3,244 | ||||||||||||
Property Management | 3,443 | 203 | 3,646 | 3,092 | 188 | 3,280 | ||||||||||||
Utilities | 3,409 | 360 | 3,769 | 2,584 | 240 | 2,824 | ||||||||||||
Repairs and Maintenance | 5,974 | 433 | 6,407 | 4,829 | 382 | 5,211 | ||||||||||||
Insurance | 836 | 31 | 867 | 763 | 29 | 792 | ||||||||||||
Total Real Estate Expenses | 16,508 | 1,678 | 18,186 | 13,847 | 1,504 | 15,351 | ||||||||||||
Net Operating Income | $ | 10,986 | $ | 3,744 | 14,730 | $ | 12,112 | $ | 4,297 | 16,409 | ||||||||
Interest | 4,845 | 4,287 | ||||||||||||||||
Depreciation and amortization | 5,782 | 5,328 | ||||||||||||||||
Administration of REIT | 1,217 | 1,201 | ||||||||||||||||
Other income | (503) | (243) | ||||||||||||||||
Net Income | $ | 3,389 | $ | 5,836 | ||||||||||||||
Net Income Attributed to: | ||||||||||||||||||
Noncontrolling Interest | $ | 2,175 | $ | 3,784 | ||||||||||||||
Sterling Real Estate Trust | $ | 1,214 | $ | 2,052 | ||||||||||||||
Dividends per share (1) | $ | 0.2875 | $ | 0.2650 | ||||||||||||||
Earnings per share | $ | 0.1200 | $ | 0.2100 | ||||||||||||||
Weighted average number of common shares | 10,465 | 9,983 | ||||||||||||||||
| (1) | Does not take into consideration the amounts distributed by the Operating Partnership to limited partners. |
Revenues
Property revenues of $32,916 for the three months ended March 31, 2022 increased $1,156 or 3.6% in comparison to the same period in 2021. Residential property revenues increased $1,535 and commercial property revenues decreased $379.
The following table illustrates changes in occupancy for the three-month periods indicated:
| March 31, | March 31, | |||
| 2022 | 2021 | |||
Residential occupancy | 94.1 | % | 94.7 | % | |
Commercial occupancy | 74.8 | % | 91.9 | % |
29
Residential revenues for the three months ended March 31, 2022 increased $1,535 or 5.9% in comparison to the same period for 2021. Residential properties acquired since January 1, 2021 contributed approximately $1,444 to the increase in total residential revenues for the three months ended March 31, 2022. The remaining increase is due to increased rent charges at our stabilized properties. Residential revenues comprised 83.5% of total revenues for the three months ended March 31, 2022 compared to 81.7% of total revenues for the three months ended March 31, 2021. The residential occupancy rates for the three months ended March 31, 2022 decreased 0.6% primarily due to increased vacancy.
For the three months ended March 31, 2022, total commercial revenues decreased $379 or 6.5% in comparison to the same period for 2021. The decrease was primarily attributed to the disposition of three commercial real estate investments in 2022 and 2021. These properties account for $234 of decreased commercial rent during the three months ended March 31, 2022. Increased vacancy in the Minneapolis market accounts for $325 of decreased commercial revenue. The commercial occupancy rates for the year ended March 31, 2022 decreased 17.1% primarily due to office spaces located in the Minnesota market.
Expenses
Residential expenses from operations of $16,508 during the three months ended March 31, 2022 increased $2,661 or 19.2% in comparison to the same period in 2021. The increase is attributed to an increase in repairs and maintenance expense of $1,145 or 23.7%. Properties acquired since January 1, 2021 attributed $266 to the increase in repairs and maintenance expense. Additionally, increased project and upgrade costs, which are considered to be deferred maintenance costs from the year ended 2020, due to COVID-19 restrictions attribute to the increase in repairs and maintenance expense during the three months ended March 31, 2022. The increase is also attributed to an increase in utility expense of $825 or 31.9% as well as an increase in property management expense of $351 or 11.4%. The main reason for the increases in utility and property management expenses is related to the properties acquired since January 1, 2021, which account for $196 and $187 of the increase, respectively.
Commercial expenses from operations of $1,678 during the three months ended March 31, 2022 increased $174 or 11.6% in comparison to the same period in 2021. The increase in overall expenses is attributed to an increase in utility expense of $120 or 50.0%. Repair and maintenance expenses during the three months ended March 31, 2022 increased by $51 or 13.4% in comparison to the same period 2021, also contributed to the overall increase.
Interest expense of $4,845 during the three months ended March 31, 2022 increased $558 or 13.0% in comparison to the same period in 2021. Interest expense related to financing activities increased by $451 during the three months ended March 31, 2022 as compared to the same period in 2021. The Trust continued to take advantage of the low interest rate environment throughout 2021 and into the first quarter of 2022 as we refinanced high-rate loans for new, lower rate mortgages while also financing new mortgage debt to raise capital. Though the overall debt and interest expense increased, the refinances and additional financing completed, improved the Trust’s weighted average interest rate by 19 basis points to 3.79% at March 31, 2022, as compared to 3.98% at March 31, 2021. Capitalized interest expense related to construction in progress increased $70 during the three months ended March 31, 2022. During the three months ended March 31, 2022, interest expense was 14.7% of total revenues.
Depreciation and amortization expense of $5,782 during the three months ended March 31, 2022 increased $454 or 8.5%. Properties acquired since January 1, 2021, contributed approximately $359 to the increase in depreciation expense. Amortization expense will continue to decrease as lease intangibles become fully amortized but will increase upon acquisitions of intangible assets. Depreciation and amortization expense as a percentage of rental income for the year ended March 31, 2022 and 2021was 17.6% and 16.8%, respectively.
REIT administration expenses of $1,217 during the three months ended March 31, 2022 increased $16 or 1.3% compared to the same period in 2021. The increase is attributable to an increase in the amount of the REIT advisory fee.
Other income of $503 for the three months ended March 31, 2022 increased $260 or 107.0% in comparison to the same period in 2021. The increase is attributed to realized gains on the sale of real estate investments of $1,329 as compared to 2021. The increase is offset by a decrease in equity in affiliates of $1,141, caused by depreciation expense related to two developments being put into service.
30
Construction in Progress and Development Projects
The Trust capitalizes direct and certain indirect project costs incurred during the development period such as construction, insurance, architectural, legal, interest and other financing costs, and real estate taxes. At such time as the development is considered substantially complete, the capitalization of certain indirect costs such as real estate taxes and interest and financing costs cease, and all project-related costs included in construction in process are reclassified to land and building and other improvements.
Construction in progress as of March 31, 2022, consists primarily of construction at residential properties located in North Dakota and Minnesota. Prairiewood Meadows located in Fargo, North Dakota consists of the re-development of one building due to a fire, a water main break, a new club house for residents, parking lot additions and repairs and replacement of windows and patio doors on the other two buildings. The re-development of one building is substantially complete with current expectations to be completed in the early second quarter of 2022. The parking lot and clubhouse will remain in construction phase throughout the second and third quarter of 2022. The current budget for this property is $3,884 of which $2,622 has been incurred and accrued for in construction in progress. Parkwest Gardens located in Fargo, North Dakota is adding a club house for residents through the second and third quarter of 2022. As of March 31, 2022, the property was still in the design phase of the project where budgeted for this property to date is $470 of which $25 has incurred in construction in progress. Maplewood Apartments located in Maplewood, Minnesota consists of parking lot repairs and reconstruction of one building due to a fire affecting multiple units and common areas. The current budget for this property is $577 of which $458 of which has incurred. Both improvements are expected to be completed in the second quarter of 2022 pending weather.
Funds From Operations (FFO)
Funds From Operations (FFO) applicable to common shares and limited partnership units means net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis.
Historical cost accounting for real estate assets implicitly assumes the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. The term Funds From Operations (FFO) was created to address this problem. It was intended to be a standard supplemental measure of REIT operating performance that excluded historical cost depreciation from — or “added back” to — GAAP net income.
Our management believes this non-GAAP measure is useful to investors because it provides supplemental information that facilitates comparisons to prior periods and for the evaluation of financial results. Management uses this non-GAAP measure to evaluate our financial results, develop budgets and manage expenditures. The method used to produce non-GAAP results is not computed according to GAAP, is likely to differ from the methods used by other companies and should not be regarded as a replacement for corresponding GAAP measures. Management encourages the review of the reconciliation of this non-GAAP financial measure to the comparable GAAP results.
Since the introduction of the definition of FFO, the term has come to be widely used by REITs. In the view of National Association of Real Estate Investment Trusts (“NAREIT”), the use of the definition of FFO (combined with the primary GAAP presentations required by the Securities and Exchange Commission) has been fundamentally beneficial, improving the understanding of operating results of REITs among the investing public and making it easier to compare the results of one REIT with another.
While FFO applicable to common shares and limited partnership units are widely used by REITs as performance metrics, all REITs do not use the same definition of FFO or calculate FFO in the same way. The FFO reconciliation presented here is not necessarily comparable to FFO presented by other real estate investment trusts. FFO should also not be considered as an alternative to net income as determined in accordance with GAAP as a measure of a real estate investment trust’s performance, but should be considered as an additional, supplemental measure, and should be viewed in conjunction with net income as presented in the consolidated financial statements included in this report. FFO applicable to common shares
31
and limited partnership units does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of sufficient cash flow to fund a real estate investment trust’s need or its ability to service indebtedness or to pay dividends to shareholders.
The following tables include calculations of FFO and the reconciliations to net income, during the three months ended March 31, 2022 and 2021, respectively. We believe these calculations are the most comparable GAAP financial measure:
Reconciliation of Net Income Attributable to Sterling to FFO Applicable to Common Shares and Limited Partnership Units
Three months ended March 31, 2022 | Three months ended March 31, 2021 | |||||||||
Weighted Avg | Weighted Avg | |||||||||
Shares and | Shares and | |||||||||
| Amount |
| Units |
| Amount |
| Units | |||
(unaudited) | ||||||||||
(in thousands) | ||||||||||
Net Income attributable to Sterling Real Estate Trust | $ | 1,214 | 10,465 | $ | 2,052 | 9,983 | ||||
Add back: | ||||||||||
Noncontrolling Interest - OPU | 2,145 | 18,495 | 3,753 | 18,260 | ||||||
Depreciation & Amortization from continuing operations | 5,782 | 5,328 | ||||||||
Pro rata share of unconsolidated affiliate depreciation and amortization | 1,089 | 140 | ||||||||
Subtract: | ||||||||||
Gain on sale of land, depreciable real estate, investment in equity method investee, and change in control of real estate investments | (1,329) | — | ||||||||
Funds from operations applicable to common shares and limited partnership units (FFO) | $ | 8,901 | 28,960 | $ | 11,273 | 28,243 | ||||
Liquidity and Capital Resources
Evaluation of Liquidity
We continually evaluate our liquidity and ability to fund future operations, debt obligations, and any repurchase requests. As part of our analysis, we consider among other items, the credit quality of tenants, and current lease terms and projected expiration dates, as well as the effect of the COVID-19 pandemic on rental income proceeds.
Our principal demands for funds will be for the: (i) acquisition of real estate and real estate-related investments, (ii) payment of acquisition related expenses and operating expenses, (iii) payment of dividends/distributions, (iv) payment of principal and interest on current and any future outstanding indebtedness, (v) redemptions of our securities under our redemption plans and (vi) capital improvements, development projects, and property related expenditures. Generally, we expect to meet cash needs for the payment of operating expenses and interest on outstanding indebtedness from cash flow from operations. We expect to pay dividends/distributions and any repurchase requests to our shareholders and the unit holders of our Operating Partnership from cash flow from operations; however, we may use other sources to fund dividends/distributions and repurchases, as necessary.
At March 31, 2022, our unrestricted cash resources consisted of cash and cash equivalents totaling approximately $49,854. Our unrestricted cash reserves can be used for working capital needs and other commitments. In addition, we had unencumbered properties with a gross book value of $65,684, which could potentially be used as collateral to secure additional financing in future periods.
The Trust has a $4,915 variable rate (floating LIBOR plus 2.00%) line of credit agreement with Bremer Bank, which expires in June 2022; and a $5,000 variable rate (floating LIBOR plus 2.00%) line of credit agreement with Bremer Bank, which expires December 2022. The lines of credit are secured by specific properties. At March 31, 2022, the Bremer lines of credit secured two letters of credit totaling $67, leaving $9,848 available and unused under the agreements. The Trust anticipates renewing the line of credit expiring in the next 12 months to continue to hold it as a cash resource to the Trust.
32
The sale of our securities and issuance of limited partnership units of the Operating Partnership in exchange for property acquisitions and sale of additional common or preferred shares is also expected to be a source of long-term capital for the Trust.
During the three months ended March 31, 2022, we did not sell any common shares in private placements. During the three months ended March 31, 2022, we issued 79,000 and 57,000 common shares under the dividend reinvestment plan and optional share purchases, respectively, which raised gross proceeds of $3,029. During the three months ended March 31, 2021, we did not sell any common shares in private placements. During the three months ended March 31, 2021, we issued 89,000 and 65,000 common shares under the dividend reinvestment plan and as optional share purchases, respectively, which raised gross proceeds of $2,993.
Additionally, to reduce our cash investment and liquidity needs, the Trust utilizes the UPREIT structure whereby we can acquire property in whole or in part by issuing partnership units in lieu of cash payments. During the three months ended March 31, 2022, the Trust issued approximately 443,000 limited partnership units of the Operating Partnership valued at $23.00 per unit for an aggregate consideration of approximately $10,180 for the purchase of real estate investments. No limited partnership units of the Operating Partnership were issued in relation to the acquisition of real estate investments for the three months ended March 31, 2021.
The Board of Trustees, acting as general partner for the Operating Partnership, determined an estimate of fair value for the limited partnership units exchanged through the UPREIT structure. In determining this value, the Board relied upon their experience with, and knowledge about, the Trust’s real estate portfolio and debt obligations. The Board typically determines the fair value on an annual basis. The Trustees determine the fair value, in their sole discretion and use data points to guide their determination which is typically based on a consensus of opinion. Thus, the Trust does not employ any specific valuation methodology or formula. Rather, the Board looks to available data and information, which is often adjusted and weighted to comport more closely with the assets held by the Trust at the time of valuation. The principal valuation methodology utilized is the NAV calculation/direct capitalization method. The information made available to the Board is assembled by the Trust’s Advisor. In addition, the Board considers how the price chosen will affect existing share and unit values, redemption prices, dividend coverage ratios, yield percentages, dividend reinvestment factors, and future UPREIT transactions, among other considerations and information. The fair value was not determined based on, nor intended to comply with, fair value standards under US GAAP and the value may not be indicative of the price we would get for selling our assets in their current condition. At this time, no shares are held in street name accounts and the Trust is not subject to FINRA’s specific pricing requirements set out in Rule 2340 or otherwise.
As with any valuation methodology, the methodologies utilized by the Board in reaching an estimate of the value of the shares and limited partnership units are based upon a number of estimates, assumptions, judgments, or opinions that may, or may not, prove to be correct. The use of different estimates, assumptions, judgments, or opinions would likely have resulted in significantly different estimates of the value of the shares and limited partnership units. In addition, the Board’s estimate of share and limited partnership unit value is not based on the book values of our real estate, as determined by GAAP, as our book value for most real estate is based on the amortized cost of the property, subject to certain adjustments.
Cash on hand, together with cash from operations and access to the lines of credit, is expected to provide sufficient capital to meet the Company’s needs for at least the next 12 months and as appropriate, we will use cash flows from operations, net proceeds from share offerings, debt proceeds, and proceeds from the disposition of real estate investments to meet long term liquidity demands.
Credit Quality of Tenants
We are exposed to credit risk within our tenant portfolio, which can reduce our results of operations and cash flow from operations if our tenants are unable to pay their rent. Tenants experiencing financial difficulties may become delinquent on their rent or default on their leases and, if they file for bankruptcy protection, may reject our lease in bankruptcy court, resulting in reduced cash flow. This may negatively impact net asset values and require us to incur impairment charges. Even if a default has not occurred and a tenant is continuing to make the required lease payments, we may restructure or renew leases on less favorable terms, or the tenant’s credit profile may deteriorate, which could affect the value of the leased asset and could in turn require us to incur impairment charges.
33
To mitigate credit risk on commercial properties, we have historically looked to invest in assets that we believe are critically important to our tenants’ operations and have attempted to diversify our portfolio by tenant, tenant industry and geography. We also monitor all of our property’s performance through review of rent delinquencies as a precursor to a potential default, meetings with tenant management and review of tenants’ financial statements and compliance with financial covenants. When necessary, our asset management process includes restructuring transactions to meet the evolving needs of tenants, refinancing debt and selling properties, as well as protecting our rights when tenants default or enter into bankruptcy.
Lease Expirations and Occupancy
Our residential leases are for a term of one year or less. The Advisor, with the assistance of our property managers, actively manages our real estate portfolio and begins discussing options with tenants in advance of scheduled lease expirations. In certain cases, we may obtain lease renewals from our tenants; however, tenants may elect to move out at the end of their term. In the cases where tenants elect not to renew, we may seek replacement tenants or try to sell the property.
Cash Flow Analysis
Our objectives are to generate sufficient cash flow over time to provide shareholders with increasing dividends and to seek investments with potential for strong returns and capital appreciation throughout varying economic cycles. We have funded 100% of the dividends from operating cash flows. In setting a dividend rate, we focus primarily on expected returns from investments we have already made to assess the sustainability of a particular dividend rate over time.
Three months ended | ||||||
March 31, | ||||||
| 2022 |
| 2021 | |||
(in thousands) | ||||||
Net cash flows provided by operating activities | $ | 7,457 | $ | 8,909 | ||
Net cash flows used in investing activities | $ | (10,187) | $ | (4,116) | ||
Net cash flows provided by (used in) financing activities | $ | 3,567 | $ | (2,081) | ||
Operating Activities
Our real estate properties generate cash flow in the form of rental revenues, which is reduced by interest payments, direct lease costs and property-level operating expenses. Property-level operating expenses consist primarily of property management fees including salaries and wages of property management personnel, utilities, cleaning, repairs, insurance, security and building maintenance cost, and real estate taxes. Additionally, we incur general and administrative expenses, advisory fees, acquisition and disposition expenses and financing fees.
Net cash provided by operating activities was $7,452 and $8,909 for the year ended March 31, 2022 and 2021, respectively, which consists primarily of net income from property operations adjusted for non-cash depreciation and amortization.
Investing Activities
Our investing activities generally consist of real estate-related transactions (purchases and sales of properties) and payments of capitalized property-related costs such as intangible assets and reserve escrows.
Net cash used in investing activities was $10,187 and $4,116 for the three months ended March 31, 2022 and 2021, respectively (this does not include the value of UPREIT units issued in connection with investing activities). For the three months ended March 31, 2022 and 2021, cash flows used in investing activities related to the acquisition of properties and capital expenditures was $7,295 and $3,686, respectively. Cash outlays related to investments in unconsolidated affiliates was $6,444 and $2,090 during the three months ended March 31, 2022 and 2021, respectively. Proceeds from involuntary conversions for the three months ended March 31, 2022 and 2021 was $261 and $1,642, respectively. Proceeds from sale of real estate investments during the three months ended March 31, 2022 was $2,622. During the three months ended March 31, 2021, there were no proceeds from the sale of real estate investments.
34
Financing Activities
Our financing activities generally consist of funding property purchases by raising proceeds and securing mortgage notes payable as well as paying dividends, paying syndication costs, and making principal payments on mortgage notes payable.
Net cash provided by financing activities was $3,567 and used in financing activities $2,081 for the three months ended March 31, 2022 and 2021, respectively. During the three months ended March 31, 2022, we paid $5,851 in dividends and distributions, redeemed $736 of shares and units, received proceeds of $12,867 from new mortgage notes, and made mortgage principal payments of $3,931. For the three months ended March 31, 2021, we paid $5,761 in dividends and distributions, redeemed $1,405 of shares and units, received proceeds of $18,485 from new mortgage notes, and made mortgage principal payments of $14,528.
Dividends and Distributions
Common Stock
We declared cash dividends to our shareholders during the period from January 1, 2022 to March 31, 2022 totaling $3,007 or $0.2875 per share, of which $1,130 were cash dividends and $1,877 were reinvested under the dividend reinvestment plan. The cash dividends were paid with the $7,457 from our cash flows from operations.
We declared cash dividends to our shareholders during the period from January 1, 2021 to March 31, 2021 totaling $2,642 or $0.2650 per share, of which $963 were cash dividends and $1,679 were reinvested under the dividend reinvestment plan. The cash dividends were paid with the $8,909 from our cash flows from operations.
We continue to provide cash dividends to our shareholders from cash generated by our operations. The following chart summarizes the sources of our cash used to pay dividends. Our primary source of cash is cash flow provided by operating activities from our investments as presented in our cash flow statement. We also include distributions from unconsolidated affiliates to the extent that the underlying real estate operations in these entities generate cash and the gain on sale of properties relates to net profits from the sale of certain properties. Our presentation is not intended to be an alternative to our consolidated statement of cash flows and does not present all sources and uses of our cash.
The following table presents certain information regarding our dividend coverage:
Three months ended | ||||||
March 31, | ||||||
| 2022 |
| 2021 | |||
(in thousands) | ||||||
Cash flows provided by operations (includes net income of $3,389 and $5,836, respectively) | $ | 7,457 | $ | 8,909 | ||
Distributions in excess of earnings received from unconsolidated affiliates |
| 105 |
| 1 | ||
Gain on sales of real estate and non-real estate investments |
| 1,329 |
| — | ||
Dividends declared |
| (3,007) |
| (2,642) | ||
Excess | $ | 5,884 | $ | 6,268 | ||
Limited Partnership Units
The Operating Partnership agreement provides that our Operating Partnership will distribute to the partners (subject to certain limitations) cash from operations on a quarterly basis (or more frequently, if we so elect) in accordance with the percentage interests of the partners. We determine the amounts of such distributions in our sole discretion.
For the three months ended March 31, 2022, we declared quarterly distributions totaling $5,359 to holders of limited partnership units in our Operating Partnership, which we paid on April 15, 2022. Distributions were paid at a rate of $0.2875 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.
35
For the three months ended March 31, 2021, we declared quarterly distributions totaling $4,835 to holders of limited partnership units in our Operating Partnership, which we paid on April 15, 2021. Distributions were paid at a rate of $0.2650 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.
Sources of Dividends and Distributions
For the three months ended March 31, 2022, aggregate dividends and distributions of $8,366, are funded with cash flows provided by operating activities and distributions from unconsolidated affiliates. Our funds from operations, or FFO, was $8,901 for the three months ended March 31, 2022; therefore, we believe our dividend and distribution policy is sustainable over time. For the three months ended March 31, 2021, we paid aggregate dividends and distributions of $7,477 with cash flows provided by operating activities and distributions from unconsolidated affiliates. Our FFO was $11,273 as of the three months ended March 31, 2021. For a further discussion of FFO, including a reconciliation of FFO to net income, see “Funds from Operations” above.
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements, see Note 2, Principal Activity and Significant Accounting Policies— Recently Issued Accounting Pronouncements, to the consolidated financial statements that are a part of this Annual Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Trust is exposed to certain risk arising from both its business operations and economic conditions and principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Trust manages economic risks, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities. The principal material financial market risk to which we are exposed, is interest-rate risk, which the Trust manages through the use of derivative financial instruments. Specifically, the Trust enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. During the three months ended March 31, 2022, the Trust used 12 interest rate swaps to hedge the variable cash flows associated with market interest rate risk. These swaps have an aggregated notional amount of $108,061 at March 31, 2022. We do not enter into derivative instruments for trading or speculative purposes. The interest rate swaps expose us to credit risk in the event of non-performance by the counterparty under the terms of the agreement.
As of March 31, 2022, we had one variable-rate mortgage debt outstanding of $5,183. Additionally, the Trust had $108,061 of variable-rate borrowings, with the total outstanding balance fixed through interest rate swaps. We estimate that an increase in 30-day LIBOR of 100 basis points with constant risk spreads would result in our net income being reduced by approximately $52 on an annual basis. We estimate that a decrease in 30-day LIBOR of 100 basis points would increase the amount of net income by a similar amount. Even though our goal is to maintain a fairly low exposure to interest rate risk, we may become vulnerable to significant fluctuations in interest rates on any future repricing or refinancing of our fixed or variable rate debt or future debt.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2022, such disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
36
Changes in Internal Controls over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the first fiscal quarter of 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time we may be involved in disputes or litigation relating to claims arising out of our operations. We are not currently a party to any legal proceedings that could reasonably be expected to have a material adverse effect on our business, financial condition or results of operation.
Item 1A. Risk Factors.
There have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the period ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Sale of Securities
Neither Sterling nor the Operating Partnership issued any unregistered securities during the three months ended March 31, 2022.
Other Sales
During the three months ended March 31, 2022, we did not issue any common shares in exchange for limited partnership units of the Operating Partnership on a one-for-one basis pursuant to redemption requests made by accredited investors pursuant to Section 4(a)(2) and Rule 506 of Regulation D.
Redemptions of Securities
Set forth below is information regarding common shares and limited partnership units redeemed during the three months ended March 31, 2022:
|
| Average | Total Number of | Total Number of | Approximate Dollar Value of | ||||||||||
Total Number | Total Number | Price | Shares Redeemed | Units Redeemed | Shares (or Units) that May | ||||||||||
of Common | of Limited | Paid per | as Part of | as Part of | Yet Be Redeemed Under | ||||||||||
Shares | Partner Units | Common | Publicly Announced | Publicly Announced | Publicly Announced | ||||||||||
Period |
| Redeemed |
| Redeemed |
| Share/Unit |
| Plans or Programs |
| Plans or Programs |
| Plans or Programs | |||
January 1-31, 2022 | 6,000 | 2,000 | $ | 21.85 | 1,456,000 | 1,115,000 | $ | 16,579 | |||||||
February 1-29, 2022 | 5,000 | 1,000 | $ | 21.85 | 1,461,000 | 1,116,000 | $ | 16,424 | |||||||
March 1-31, 2022 | 7,000 | 12,000 | $ | 21.85 | 1,468,000 | 1,128,000 | $ | 16,025 | |||||||
Total | 18,000 | 15,000 | |||||||||||||
For the three months ended March 31, 2022, we redeemed all shares or units for which we received redemption requests. In addition, for the three months ended March 31, 2022, all common shares and units redeemed were redeemed as part of the publicly announced plans.
The Amended and Restated Share Redemption Plan permits us to repurchase common shares held by our shareholders and limited partnership units held by partners of our Operating Partnership, up to a maximum amount of $55,000 worth of shares and units, upon request by the holders after they have held them for at least one year and subject to other conditions and limitations described in the plan. The amount remaining to be redeemed as of March 31, 2022, was $16,025. The redemption price for such shares and units redeemed under the plan was fixed at $21.85 per share or unit, which became effective January 1, 2022. The redemption plan will terminate in the event the shares become listed on any national securities exchange, the subject of bona fide quotes on any inter-dealer quotation system or electronic communications
37
network or are the subject of bona fide quotes in the pink sheets. Additionally, the Board, in its sole discretion, may terminate, amend, or suspend the redemption plan at any time if it determines to do so is in our best interest.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
38
Item 6. Exhibits.
Exhibit | ||
Number | Title of Document | |
10.1 | ||
31.1 | ||
31.2 | ||
32.1 | ||
101 | The following materials from Sterling Real Estate Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, formatted in iXBRL (Inline iXtensible Business Reporting Language): (i) Consolidated Balance Sheets at March 31, 2022 and December 31, 2021; (ii) Consolidated Statements of Operations and Other Comprehensive Income for the three months ended March 31, 2022 and 2021; (iii) Consolidated Statements of Shareholders’ Equity for three months ended March 31, 2022 and 2021; (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021, and; (v) Notes to Consolidated Financial Statements. | |
104 | Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101. |
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated:May 11, 2022
STERLING REAL ESTATE TRUST | ||
By: | /s/ Kenneth P. Regan | |
Kenneth P. Regan | ||
Chief Executive Officer | ||
(Principal Executive Officer) | ||
By: | /s/ Damon K. Gleave | |
Damon K. Gleave | ||
Chief Financial Officer | ||
(Principal Financial Officer) | ||
40